Scope for Renegotiation in Private Debt Contracts

I provide new evidence on the renegotiation of financial contracts using a comprehensive sample of over 90,000 debt contract renegotiations. I study whether the demand for monitoring determines the renegotiation intensity, defined as either the renegotiation frequency over a period of time or the time between renegotiations. Theory suggests that frequent debt contract renegotiation trades off the benefits of enhanced monitoring with the costs of suboptimal creditor intervention. Consistent with this tradeoff, I find that proxies for the increased demand for monitoring, such as financing constraints and the audit premium, exhibit a higher renegotiation intensity. In turn, the costs of creditor monitoring, proxied by the presence of growth options and R&D, are associated with a lower renegotiation intensity. I also find that contractual monitoring mechanisms, such as syndicate concentration and control rights, exhibit robust positive associations with renegotiation intensity. The evidence supports theories that emphasize the strategic aspect of control rights. Finally, renegotiations reveal new information to the market, consistent with their role in reducing information asymmetries. Overall, the evidence suggests the demand for monitoring is an important driver of renegotiation